Strategic Management and Business Policy Questions

General Instructions – PLEASE READ THEM CAREFULLY
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The Assignment must be submitted on Blackboard (WORD format only) via allocated
folder.
Students must mention question number clearly in their answer.
Avoid plagiarism, the work should be in your own words, copying from students or other
resources without proper referencing will result in ZERO marks. No exceptions.
All answered must be typed using Times New Roman (size 12, double-spaced) font. No
pictures containing text will be accepted and will be considered plagiarism).
Learning Outcomes:
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Recognize the basic concepts and terminology used in Strategic Management. ClO-1
Describe the different issues related to environmental scanning, strategy formulation, and
strategy implementation in diversified organizations. ClO-2
Demonstrate how executive leadership is an important part of strategic management. ClO-5
Assignment Question(s):
A. Discussion questions
1. How can a decision maker identify strategic factors in a corporation’s external
international environment?
2. Discuss the relationship between corporate governance and social responsibility?
Give examples.
B. Critical thinking
Review the figure 4-3, p.110 from your textbook and answer the following questions:
1. Choose any example of industry from the real national or international market, and
detail Porters’ five forces framework with a graphic representation.
2. According to Porter’s framework, what determines the level of competitive
intensity in your chosen industry? (
3. Assess the threat of new entrants, and substitute products/ services for your chosen
industry
4. Is your chosen industry attractive for investment? Why or why not?
Answers
A. Discussion questions
1. Answer Q1-
2. Answer Q2-
A. Critical thinking
1. Answer Q1-
2. Answer Q2-
3. Answer Q3-
4. Answer Q4-
CHAPTER 4
Environmental Scanning and Industry Analysis
113
A buyer purchases a large proportion of the seller’s product or service (for example, oil
filters purchased by a major auto maker).
A buyer has the potential to integrate backward by producing the product itself (for exam-
ple, a newspaper chain could make its own paper).
Alternative suppliers are plentiful because the product is standard or undifferentiated (for
example, motorists can choose among many gas stations).
Changing suppliers costs very little (for example, office supplies are easy to find).
The purchased product represents a high percentage of a buyer’s costs, thus providing an
incentive to shop around for a lower price (for example, gasoline purchased for resale by
convenience stores makes up half their total costs).
A buyer earns low profits and is thus very sensitive to costs and service differences (for
example, grocery stores have very small margins).
The purchased product is unimportant to the final quality or price of a buyer’s products or
services and thus can be easily substituted without affecting the final product adversely
(for example, electric wire bought for use in lamps).
Bargaining Power of Suppliers
Suppliers can affect an industry through their ability to raise prices or reduce the quality of pur-
chased goods and services. A supplier or supplier group is powerful if some of the following
factors apply:
The supplier industry is dominated by a few companies, but it sells to many (for example,
the petroleum industry).
Its product or service is unique and/or it has built up switching costs (for example, word
processing software).
Substitutes are not readily available (for example, electricity).
Suppliers are able to integrate forward and compete directly with their present customers
(for example, a microprocessor producer such as Intel can make PCs).
A purchasing industry buys only a small portion of the supplier group’s goods and ser-
vices and is thus unimportant to the supplier (for example, sales of lawn mower tires are
less important to the tire industry than are sales of auto tires).
Relative Power of Other Stakeholders
A sixth force should be added to Porter’s list to include a variety of stakeholder groups from
the task environment. Some of these groups are governments (if not explicitly included else-
where), local communities, creditors (if not included with suppliers), trade associations,
special-interest groups, unions (if not included with suppliers), shareholders, and complemen-
tors. According to Andy Grove, Chairman and past CEO of Intel, a complementor is a com-
pany (e.g., Microsoft) or an industry whose product works well with a firm’s (e.g., Intel’s)
product and without which the product would lose much of its value.51 An example of com-
plementary industries is the tire and automobile industries. Key international stakeholders who
determine many of the international trade regulations and standards are the World Trade Or-
ganization, the European Union, NAFTA, ASEAN, and Mercosur.
The importance of these stakeholders varies by industry. For example, environmental
groups in Maine, Michigan, Oregon, and Iowa successfully fought to pass bills outlawing dis-
posable bottles and cans, and thus deposits for most drink containers are now required. This
effectively raised costs across the board, with the most impact on the marginal producers who
112
PART 2 Scanning the Environment
example, the entry by mail order companies such as Dell and Gateway into a PC industry previ-
ously dominated by IBM, Apple, and Compaq increased the level of competitive activity to such
an extent that any price reduction or new product introduction was quickly followed by similar
moves from other PC makers. The same is true of prices in the United States airline industry. Ac-
cording to Porter, intense rivalry is related to the presence of several factors, including:
Number of competitors: When competitors are few and roughly equal in size, such as in
the auto and major home appliance industries, they watch each other carefully to make
sure that they match any move by another firm with an equal countermove.
Rate of industry growth: Any slowing in passenger traffic tends to set off price wars in
the airline industry because the only path to growth is to take sales away from a competitor.
Product or service characteristics: A product can be very unique, with many qualities
differentiating it from others of its kind or it may be a commodity, a product whose char-
acteristics are the same, regardless of who sells it. For example, most people choose a gas
station based on location and pricing because they view gasoline as a commodity.
Amount of fixed costs: Because airlines must fly their planes on a schedule, regardless
of the number of paying passengers for any one flight, they offer cheap standby fares
whenever a plane has empty seats.
Capacity: If the only way a manufacturer can increase capacity is in a large increment by
building a new plant (as in the paper industry), it will run that new plant at full capacity
to keep its unit costs as low as possible—thus producing so much that the selling price
falls throughout the industry.
Height of exit barriers: Exit barriers keep a company from leaving an industry. The brew-
ing industry, for example, has a low percentage of companies that voluntarily leave the in-
dustry because breweries are specialized assets with few uses except for making beer.
Diversity of rivals: Rivals that have very different ideas of how to compete are likely
to cross paths often and unknowingly challenge each other’s position. This happens of-
ten in the retail clothing industry when a number of retailers open outlets in the same
location—thus taking sales away from each other. This is also likely to happen in some
countries or regions when multinational corporations compete in an increasingly global
economy.
Threat of Substitute Products or Services
A substitute product is a product that appears to be different but can satisfy the same need as
another product. For example, e-mail is a substitute for the fax, Nutrasweet is a substitute for
sugar, the Internet is a substitute for video stores, and bottled water is a substitute for a cola.
According to Porter, “Substitutes limit the potential returns of an industry by placing a ceiling
on the prices firms in the industry can profitably charge.”50 To the extent that switching costs
are low, substitutes may have a strong effect on an industry. Tea can be considered a substitute
for coffee. If the price of coffee goes up high enough, coffee drinkers will slowly begin switch-
ing to tea. The price of tea thus puts a price ceiling on the price of coffee. Sometimes a diffi-
cult task, the identification of possible substitute products or services means searching for
products or services that can perform the same function, even though they have a different ap-
pearance and may not appear to be easily substitutable.
Bargaining Power of Buyers
Buyers affect an industry through their ability to force down prices, bargain for higher quality
or more services, and play competitors against each other. A buyer or a group of buyers is pow-
erful if some of the following factors hold true:
CHAPTER 4
Environmental Scanning and Industry Analysis
111
rivalry is high (Nike, Reebok, New Balance, Converse, and Adidas are strong competitors
worldwide), threat of potential entrants is low (the industry has reached maturity/sales growth
rate has slowed), threat of substitutes is low (other shoes don’t provide support for sports ac-
tivities), bargaining power of suppliers is medium but rising (suppliers in Asian countries are
increasing in size and ability), bargaining power of buyers is medium but increasing (prices
are falling as the low-priced shoe market has grown to be half of the U.S. branded athletic shoe
market), and threat of other stakeholders is medium to high (government regulations and hu-
man rights concerns are growing). Based on current trends in each of these competitive forces,
the industry’s level of competitive intensity will continue to be high—meaning that sales in-
creases and profit margins should continue to be modest for the industry as a whole. 49
Threat of New Entrants
New entrants to an industry typically bring to it new capacity, a desire to gain market share,
and substantial resources. They are, therefore, threats to an established corporation. The threat
of entry depends on the presence of entry barriers and the reaction that can be expected from
existing competitors. An entry barrier is an obstruction that makes it difficult for a company
to enter an industry. For example, no new domestic automobile companies have been success-
fully established in the United States since the 1930s because of the high capital requirements
to build production facilities and to develop a dealer distribution network. Some of the possi-
ble barriers to entry are:
Economies of scale: Scale economies in the production and sale of microprocessors, for
example, gave Intel a significant cost advantage over any new rival.
Product differentiation: Corporations such as Procter & Gamble and General Mills,
which manufacture products such as Tide and Cheerios, create high entry barriers through
their high levels of advertising and promotion.
Capital requirements: The need to invest huge financial resources in manufacturing fa-
cilities in order to produce large commercial airplanes creates a significant barrier to en-
try to any competitor for Boeing and Airbus.
Switching costs: Once a software program such as Excel or Word becomes established in
an office, office managers are very reluctant to switch to a new program because of the
high training costs.
Access to distribution channels: Small entrepreneurs often have difficulty obtaining su-
permarket shelf space for their goods because large retailers charge for space on their
shelves and give priority to the established firms who can pay for the advertising needed
to generate high customer demand.
Cost disadvantages independent of size: Once a new product earns sufficient market
share to be accepted as the standard for that type of product, the maker has a key ad-
vantage. Microsoft’s development of the first widely adopted operating system (MS-
DOS) for the IBM-type personal computer gave it a significant competitive advantage
over potential competitors. Its introduction of Windows helped to cement that advan-
tage so that the Microsoft operating system is now on more than 90% of personal com-
puters worldwide.
Government policy: Governments can limit entry into an industry through licensing re-
quirements by restricting access to raw materials, such as oil-drilling sites in protected areas.
Rivalry among Existing Firms
In most industries, corporations are mutually dependent. A competitive move by one firm can
be expected to have a noticeable effect on its competitors and thus may cause retaliation. For
110
PART 2 Scanning the Environment
PORTER’S APPROACH TO INDUSTRY ANALYSIS
Michael Porter, an authority on competitive strategy, contends that a corporation is most con-
cerned with the intensity of competition within its industry. The level of this intensity is deter-
mined by basic competitive forces, as depicted in Figure 4–3. “The collective strength of these
forces,” he contends, “determines the ultimate profit potential in the industry, where profit po-
tential is measured in terms of long-run return on invested capital.”:47 In carefully scanning its
industry, a corporation must assess the importance to its success of each of six forces: threat
of new entrants, rivalry among existing firms, threat of substitute products or services, bar-
gaining power of buyers, bargaining power of suppliers, and relative power of other stakehold-
ers.48 The stronger each of these forces, the more limited companies are in their ability to raise
prices and earn greater profits. Although Porter mentions only five forces, a sixth-other
stakeholders—is added here to reflect the power that governments, local communities, and
other groups from the task environment wield over industry activities.
Using the model in Figure 4–3, a high force can be regarded as a threat because it is likely
to reduce profits. A low force, in contrast, can be viewed as an opportunity because it may al-
low the company to earn greater profits. In the short run, these forces act as constraints on a
company’s activities. In the long run, however, it may be possible for a company, through its
choice of strategy, to change the strength of one or more of the forces to the company’s advan-
tage. For example, Dell’s early use of the Internet to market its computers was an effective way
to negate the bargaining power of distributors in the PC industry.
A strategist can analyze any industry by rating each competitive force as high, medium,
or low in strength. For example, the global athletic shoe industry could be rated as follows:
FIGURE 4-3
Forces Driving
Industry
Competition
Potential
Entrants
Threat
of New
Entrants
Relative
Power
of Unions,
Governments,
Special
Interest
Groups, etc.
Other
Stakeholders
Industry
Competitors
Bargaining
Power
of Buyers
o
Buyers
Suppliers
Rivalry Among
Existing Firms
Bargaining
Power
of Suppliers
Threat of
Substitute
Products
or Services
Substitutes
SOURCE: Reprinted with the permission of The Free Press, A Division of Simon & Schuster, from COMPETITIVE
ADVANTAGE: Techniques for Analyzing Industries and Competitors by Michael E. Porter. Copyright © 1980, 1988
by The Free Press. All rights reserved.

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